Borrowing against (not taking out) your policy cash value frees the money to do another job AND keeps the cash value growing. We always recommend you keep enough cash value stored for your emergency fund and borrow AGAINST the rest for investments.
This works just like real estate. A fully leveraged home increases in value just like a fully paid off home in THE same area does. The mortgage is a lien on the house, same as a life insurance loan is a lien against (or collateralized against) cash value.
Interest is charged when you request the loan, up front at 6-8% per year (depending on the company) and interest is refunded if you pay the loan off early. Interest is due again annually on the policy anniversary date. It should be paid out of pocket, though it can be paid by borrowing against cash value again.
Principal can be paid back monthly (set up on auto-draw), quarterly, or annually or in lump sums, whenever you want. We recommend paying principal back based on what you borrowed the cash for. A car? Pay it monthly. An investment that pays interest only to you annually (then principal is returned LATER)? Pay it annually.
Dividends get paid on the GROSS CASH VALUE so they are unaffected by the loan. Insurance companies declare the Dividend interest rate annually and this rate is reduced by the cost of the death benefit and the administrative costs of running the mutual life insurance company.